Airtel’s Profitability to Remain Under Pressure Over Next Four Quarters: Moody’s

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Bharti Airtel's profitability will remain under pressure at least over the next four quarters due to intense price competition, even as it completes the sale of 67.53 million shares, or 3.7% stake of its subsidiary, Bharti Infratel, which is credit positive, Moody's Investors Service said on Thursday.

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The stake sale was completed via its wholly owned subsidiary, Nettle Infrastructure Limited, for Rs 25.7 billion, or around $400 million. "The sale of this stake by Bharti is consistent with management's commitment to strengthening its balance sheet and reducing debt, which we view positively," Annalisa Di Chiara, a Moody's Vice President and Senior Credit Officer, said in a statement.

Earlier in March, Bharti sold a 10.3% stake in Infratel to a consortium of funds advised by KKR and the Canada Pension Plan Investment Board for a total of around Rs 61.9 billion or around $951.6 million). As a result, Bharti and its wholly owned subsidiaries have reduced their equity stake in Infratel to 58% from around 71.96% at the beginning of the year. The company reported total gross debt of Rs 1,028.1 billion at 30 June 2017.

"While a positive, even assuming all proceeds are used for debt reduction, we estimate the impact on leverage is limited. For example, pro-forma for this transaction, Moody's estimates adjusted debt/EBITDA would have been 3.43x versus 3.50x for last 12 months ended 30 June 2017," added DiChiara, also Moody's lead analyst
for Bharti.

Moody's said that Bharti's profitability remained under pressure over the last three-quarters as price competition was intense, tempering the potential effect of this debt reduction on its leverage metrics. It said that the ongoing and transformative consolidation activity in the Indian telco sector is expected to help stabilize
industry-wide average revenue per user over the longer term, intense price competition will persist over the next few quarters, as operators respond to protect and grow their market shares.

As a result, Moody's expects Bharti's profitability to remain under pressure at least over the next four quarters.

Airtel had reported EBITDA of Rs 78.2 billion, which was relatively stable compared to the previous quarter, but an 18.4% contraction year over year.

"The rating outlook is negative as we expect adjusted debt/EBITDA to rise into the 3.6x range by 31 March 2018, barring any further significant debt reduction from additional efforts to monetize its assets...upwards rating pressure is unlikely, given the negative outlook. However, the outlook could be revised to
stable if Bharti's overall credit profile strengthens, such that adjusted debt/EBITDA is sustained at, or below, 3.0x. We would also look for adjusted EBITDA margins to be sustained above 40%," Moody's said.

It added that downward rating pressure could arise if competition intensifies further in any of its key markets, but particularly for the Indian wireless business.

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